More Details on the American Family Plan
Most of you know that President Biden announced the American Family Plan a little over a week ago. Chris Hesse and I did an Ag Insights Video on more details on the plan.
A couple of key points. If President Biden gets his way, all income earned by a farmer over $1 million will be subject to a tax rate of 43.4%. He states it will only be 39.6% but it will automatically have the extra 3.8% net investment income tax applied. This tax was implemented as part of ACA, however, it was to apply only to investment income. Farmers who rented their ground to their farm operation were exempted from the tax. At the time, we surmised that at some point in the future that this tax would apply to all business income including self-rental. If President Biden gets his way, this will be the result.
Second, just because the farm stays in the family, a transfer tax may still apply. Currently, under many parts of the Tax Code, family does not include nephews, nieces and cousins. Therefore, if an Uncle leaves the land to his two nephews since he has no kids, a transfer tax may apply. Also, if the farm goes to three kids but only one kid farms the ground, the other two kids may have to pay a transfer tax. The key will be in the details.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Paul,
I agree 100%. I think that they’re expecting to include 6166-type deferral language and 2032A-type language to eliminate the tax if the “farm” stays in the family. I’ve never found either of those to be especially useful as planning tools because of the “active business” test in 6166 that raises questions about cash rent arrangements and all of the tests that must be met to qualify for 2032A.
Like you said, the key will be in the details.